Introduction

A cryptocurrency wallet is a physical or virtual repository of cryptocurrency or keys (passwords that give access to it). Cryptocurrency wallets can be applications and accounts on exchanges, devices or downloaded files. 

The purpose of cryptocurrency wallets is to provide security and storage of cryptocurrency. Therefore, when purchasing a device, registering or downloading an app, users are advised to set a strong and complex password made of numbers, Latin letters and special characters. If the user does not want to make up a complex password, the application can generate a complex password by itself. In some applications or devices, when switching on, the user immediately receives a Seed-phrase. It is 12-24 words in English, which are not connected to each other in any way, seed-phrase is a super complex and strong password.

But why so complicated? Is crypto security really that important? – Of course, because crypto is being stolen by the millions. And it will be much harder to get it back than fiat currency. That’s why a cryptocurrency wallet and its security is so important.

What is a cryptocurrency wallet and how to use it – the topic of our article. 

Custodial crypto wallets

A custodial cryptocurrency wallet is a downloadable application or account at a cryptocurrency exchange, an analogue of online banking, but with crypto and fiat. Such a cryptocurrency wallet is also called a hot wallet (HK). It is not difficult to set it up, but it is the door to the world of cryptocurrency. 

When creating an account, the user receives 2 keys: Public and private. The public or public key is the analogue of the user’s email, it is needed for the user to get the crypto. And the private key is a password, which is needed to confirm and verify transactions.

Using this account you can buy, sell cryptocurrency for fiat, exchange it, etc. In addition, if you open a card on the exchange, you will get an analogue of a bank card. All these services are provided by custodial services. But the main custodial service of exchanges is to ensure safety, privacy and security of your funds. Exchanges have many options to beef up security.

Non-custodial cryptocurrency wallets

A non-custodial wallet is a device that resembles a flash drive with a small screen and a couple of buttons. In another case, it’s a smartphone app. Such cryptocurrency wallets are called cold wallets (HK). Regardless of whether it’s a device or an app – they always have Seed-phrase and enhanced security. 

Non-custodial wallets are anonymous, i.e. it is impossible to identify the owner unless he/she allows it. With the help of such devices it is impossible to pay for goods and services, if payment with crypto is not accepted. Usually, without a connection to a PC, the devices are useless. But these wallets are decentralised, they were created specifically to store cryptocurrencies or keys (depends on their technology). Their decentralisation makes hacking and stealing your crypto virtually impossible. After all, you have to physically take possession of the cryptocurrency wallet and find out the passwords.

Also, you can transfer cryptocurrency to another cryptocurrency account through them. But for this you need to connect the device to a PC or generate a QR code at another address.

The main differences between custodial and non-custodial crypto wallets

Custodial type of storage is easier to use, they can be suitable for payment, from them you can withdraw money directly to a bank card. Custodial solutions are responsible for this. From HC you can only transfer cryptocurrency and only to a cryptocurrency wallet.

Custodial and non-custodial can be installed on a smartphone, but they can be distinguished in the following way: On HC there is necessarily a Seed-phrase, on GC – no.

When using an exchange account (custodial type of storage), the coins lie in the account of the custodian (exchange), actually belong to it. This means that your funds are vulnerable to hacker attacks, and the exchange must have a reliable defence.

Large cryptocurrency exchanges, for their reliability, offer various options for privacy protection: link your phone number, email, set up two-factor identification, etc. In this case, fraudsters will not be able to enter your account, even if they know all the keys. The reliability of the exchange is judged by such aspects as: Reputation, degree of protection, rating and customer reviews.

Non-custodial wallets are devices or applications. Their security technologies are legendary. After all, cryptocurrency with this type of storage is vulnerable only to the disappearance of the blockchain. Such wallets do not need any identification, i.e. you will be anonymous. Only you will know the password and seed phrase. If you lose your device, you will be able to recover your cryptocurrency wallet, and to steal crypto even physical possession of the device will not be enough.

If anonymity is very important to you, but you often spend crypto – you can register on our service ‘AnyExchange’. Our service as a custodian – has an impeccable reputation: the custodial service and technologies are as updated as possible and do not require the latest software. Cryptocurrency transfers through our exchanger – fast and reliable, we check all coins for AML before sending. Even money transfers from crypto to fiat and back for our service-exchanger is a routine task. You can always get fiat to card or cash even outside of Ukraine!

Pros and cons of custodial and non-custodial crypto wallets

Custodial wallets are hot and multi-currency crypto wallets, i.e. they have access to more cryptocurrencies. For example FDUSD – can only be bought on an exchange. And since koin is new, only after the upgrade will non-custodial wallets support it. 

With a custodial wallet you can pay for almost any service or product. Every year, more and more services and goods can be paid for with cryptocurrency. Cross-border fiat payments are becoming rarer. Online payments are trying to be made through crypto exchanges, and QR codes are specially generated for this purpose. Many crypto-enthusiasts see in exchanges more opportunities, greater security and even higher passive income on farming and staking, compared to banks and their deposits. That is, for traders and arbitrageurs, such crypto wallets are a necessity.

From non-custodial crypto accounts you can only pay with crypto and make transfers only between cryptocurrency accounts and accounts. If the seller does not have a cryptocurrency account – bitcoin and altcoins will be useless. In addition, to withdraw cryptocurrency from non-custodial wallets – it is possible, but it will be hard and long. However, in case you lose your HC, with the help of Seed-phrase, it can be restored.

But if you forget the Seed-phrase or third parties recognise it, you can lose your decentralised wallet. In such a situation, there is only one way out: You need to transfer all the crypto to the account, to another crypto-account and start a new wallet.

How to choose the right cryptocurrency wallet

Custodial and non-custodial crypto accounts serve different purposes, although they have, similar functions. For example, from the custodial is convenient to trade, spend cryptocurrency, generate a QR code, management – much easier. And from non-custodial – to invest in crypto.

So the choice of wallet depends only on your goals and no one says you have to choose between them. A lot of traders use different cryptocurrency wallets and don’t hide it.

For example, you can download the non-custodial Trust Wallet and the custodial app of the Binance exchange. Trust Wallet is the official HK of this exchange. With Trust Wallet you will be able to transfer cryptocurrency to the exchange, from it to the card and vice versa.

So your funds will be safe, protected from theft and you can easily withdraw them. The only disadvantage is the high commission (up to 10%). 

If you are just a beginner trader and the commission is too high for you, you can store your cryptocurrency on our exchange “AnyExchange”. We will not only ensure the safety of your funds and your anonymity, but also can deliver cash by courier right to your door. Even if you are abroad. In addition, orientated on the exchange rate on our site, you will be able to trade with prices that are market, ie they will be neither underestimated nor overestimated. 

The development of cryptocurrency wallets and their role in the future of cryptocurrencies

Cryptocurrency wallets are constantly evolving. There are now many types of custodial and non-custodial cryptocurrency wallets. A relatively recent innovation has been the emergence of cryptocurrency cards. This has greatly simplified cryptocurrency payments, and made them very common.

Custodial technologies are evolving so that users have access to new coins and networks. It is now possible to make money from crypto not only, through investments, but through steaking and farming. The development of other areas is also possible thanks to the development of cryptocurrency wallets. For example, for metavillages it is necessary to connect a wallet with certain standards of Efirium blockchain tokens.

If we talk about the development of non-custodial wallets – this is the emergence of SafePal. This device allows you to make payments with the help of its camera, through QR code, without using a PC and connection to the network. For example, Ledger, Trezor and all their modifications can work only when connected to a PC or another device.

Conclusion

The question, ‘Which wallet is better custodial or non-custodial?’ – Doesn’t make sense or have the right answer, as these devices and programmes can use the same cryptocurrency in different ways. A custodial wallet is easier to pay and manage, but the security is inferior to a non-custodial wallet. All traders agree that you can’t even keep the majority of your funds in custodial accounts. The good thing is that there is no question about which cryptocurrency wallet to choose, because you can use both. In such a tandem, they will be the most effective. 

You can use several HCs and GCs at once, based on their technologies and advantages. For example, one wallet has the right network, in another you can set the size of the commission, etc. This will contribute to the diversification and security of your funds, and in the long run, to the development of the whole sphere.